The regulators charged with carrying out a key provision of the Dodd-Frank financial reform law are warning that they don't have enough funding to do the job, but neither the Obama administration nor Washington seems to be listening.
Like other federal agencies, the Commodity Futures Trade Commission, traditionally dedicated to overseeing futures contracts, always wants more funding. In recent months, its President Obama-appointed officials have taken the more unusual step of calling out the president for failing to fund their new line of work and endangering the financial system — but no relief is in sight.
Dodd-Frank gave the CFTC responsibility for regulating the swaps market, which includes insurance-like contracts between banks and other financial institutions that were previously mostly unregulated, such as from the insurance firm AIG.
But after the White House announced a 2015 budget request for the CFTC in early March that was smaller than the previous year's ask, CFTC commissioner Bart Chilton, a Democratic appointee, issued a statement that the $280 million envisioned for the CFTC was “woefully insufficient.”
Mark Wetjen, the CFTC's Democratic acting chairman, echoed Chilton's comments a few days later, telling reporters at an industry event that the agency has only a “handful of people” reviewing regulatory data, according to the financial times.
The issue is that, thanks to Dodd-Frank, the CFTC’s purview as of October increased many times over. Oversight of a market of hundreds of trillions of dollars in notional value was added, but without additional funding.
The CFTC has written most of the new rules. But the question is whether it has the resources to enforce those rules, through the usual regulatory activities of auditing firms, examining possible rule-breakers and imposing fines.
The agency this fiscal year has a $215 million budget and fewer than 700 employees. The Securities and Exchange Commission, in comparison, has a $1.67 billion budget and 4,200 workers.
Chilton warned that the agency would face the loss of discouraged employees and the inability to collect data pertaining to certain companies. “I am fearful to say where, so as not to tip off market participants,” he wrote.
The CFTC had been angling to gain responsibility for monitoring over-the-counter derivatives since the late 1990s, when then-director Brooksley Born began looking into the risks the market for derivatives posed to the system. Famously, Born’s efforts were blocked by Federal Reserve Chairman Alan Greenspan and Democratic economic policy fixture Larry Summers.
The agency finally gained that power with Dodd-Frank, and began exercising it in early October — just in time for the federal government shutdown. Unlike some other regulatory agencies, the CFTC relies on funding from Congress rather than industry fees or other revenues.
Critics say the CFTC created its own problems by overextending itself in turf wars with other agencies and using the resources it does have for headline-seeking activities rather than its own stated priorities.
Hester Peirce, a researcher at the free-market Mercatus Center, said the agency has been “completely unrealistic” about its capabilities and pointed to its joining other agencies in prosecuting banks involved in the LIBOR rigging scandal as an example of wasted time and money that could have been dedicated to swaps oversight.
“Throwing more money at an agency that’s poorly managed is not the answer,” she said.
The agency's Republican commissioner, Scott D. O'Malia, made similar points in a dissent to the White House budget, noting that the agency didn't have a plan to invest in technological capabilities and that the “lack of mission priorities makes these wide-ranging budget requests seem somewhat random and ill-defined.”
Critics aside, there's no prospect of help for the CFTC. The December bipartisan budget agreement set the agency’s funding through fiscal 2015. Furthermore, Obama's declining budget requests, even as the agency's role expands, suggest that the CFTC and swaps oversight are waning as presidential priorities.